How does an increase in government spending funded by a balanced budget affect the economy when considering the marginal propensity to consume, and how does this differ from a budget deficit scenario?

When the government increases spending while keeping a balanced budget, it means that any extra money spent is matched by an increase in taxes or a reduction in other spending. This can boost the economy because it puts more money into the hands of consumers who tend to spend a portion of it, known as the marginal propensity to consume. For example, if the government spends $100 on building a school, and people in the area receive jobs and spend some of that money, it can create additional economic activity. In contrast, if the government spends more than it collects in taxes (a budget deficit), it may lead to borrowing, which can create uncertainty about future taxes and spending. This uncertainty can reduce consumer confidence and spending, making the positive effects of government spending less impactful in a deficit scenario.